Family Tax Cut Optimizations

by: TaxCycle

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Hope everyone is staying warm out there.

Mel

by Elizabeth (Trilogy Software) on Monday, November 03, 2014 4:00 AM

On October 30th, the federal government announced the implementation of the long-awaited income splitting tax credit which will be available to couples with children under 18. The surprising part of the announcement was that the new credit is available for 2014 and subsequent years, thus available to claim on your client’s returns for this upcoming tax preparation season.

How the credit is calculated

The credit comes in the form of a non-refundable tax credit calculated essentially as follows (some adjustments may be required for certain tax situations):

Take the taxable income of the two spouses from line 260 of the T1, and transfer 50% of the difference between the two amounts, to a maximum of $50,000, from the highest to the lowest.

Calculate what tax would be paid by each on their adjusted taxable income, totalling the two.

Next, compare the revised total against the total of what was calculated before splitting.

The difference, to a maximum of $2,000, is the Family Tax Cut credit that only one of the two spouses can claim against their tax payable.

TaxCycle will automatically calculate the best result for your clients, with its optimizations working in the background to re-evaluate if a credit is available, and which spouse is best to claim it, as you work through the return.

Conditions of eligibility

There are certain conditions to meet to be eligible to the credit. You can obtain more information about these and other details from the CRA Family Tax Cut page. Or, from the Department of Finance backgrounder on the Family Tax Cut.

Enhanced UCCB benefits

Along with the Family Tax Cut, the government announced an increase and enhancement of the Universal Child Care Benefit (UCCB), effective January, 2015:

The $100 per month payment for children under 6 will increase to $160

Parents of children from 6 to 17 years of age will receive a monthly payment of $60.

The additional $60 for children under 18 will replace the Amount for children born in 1997 or later. This amount will still be claimed on 2014 tax returns, but will not on 2015 tax returns.

Essentially, the Amount for children born in 1997 or later is being converted into an amount paid every month via the UCCB. This conversion also offers families more money than the old amount, which would likely have been $2,293 for 2015, resulting a 15% credit of $344. The new UCCB payments will provide $720 ($60 times 12) for the year. Although, the UCCB is taxable, so the net benefit will depend on the taxpayers' situation.

TaxCycle will calculate the estimated enhanced UCCB payments when you prepare your client’s 2014 tax returns for you, so you can inform them of the amounts they will receive from July 2015 onwards.

Increased child care expense limits

The government also announced an increase of $1,000 to each of the limits for child care expenses effective for 2015 and subsequent years. The calculation of the basic limit in Part B of the T778 will now use $8,000 for each child under 7, $5,000 for children ages 7 to 16, and $11,000 for children for whom the Disability amount can be claimed.